Is Europe facing the Thucydides Trap?

The EU sees a threat from the Chinese electric cars and announced an investigation into Chinese subsidies to its automotive industry, expanding the geopolitical fragmentation game from semiconductors to electric vehicles. Naturally, this makes it difficult not only for automakers to operate, but also for investors to pick long-term winners in the electric vehicle space, and we suggest that investors pay increasingly close attention to the developing and expanding electric vehicle ecosystem.

The fragmentation game is evolving: from semiconductors to the green transformation

European Commission President Ursula von der Leyen announced in her annual speech to EU lawmakers that the EU would launch an investigation into Chinese subsidies for electric vehicle production, which has resulted in a flood of cheap Chinese electric cars on the market. In the past, Chinese cars did not pose a threat to European manufacturers due to low build quality, but Chinese manufacturers have gradually become more knowledgeable, and the drive to switch from combustion to electric cars has undoubtedly flattened and shortened the learning curve, presenting an opportunity for Chinese car manufacturers .

Chinese manufacturers are already facing 27,5% tariffs on their electric vehicles exported to the US market, so it is reasonable to assume that Europe will begin to consider imposing a similar tariff. The initial market reaction was negative for Chinese electric vehicle makers and positive for the European automotive industry, but the price action has not extended today, suggesting that the market is currently in wait-and-see mode. Today, the Middle Kingdom responded that the EU's action is an "act of pure protectionism" and may negatively affect trade relations between the EU and China. The fact that China heavily subsidizes its automotive industry is not indicated by the capacity utilization rate of car factories, which, according to the Chinese Passenger Car Manufacturers Association (CPCA), is only 54,5% compared to 66,6% in 2017. This proves of overinvestment and perhaps even material misinvestment in non-productive assets.

Thucydides trap, which the United States faces in the context of competition with China semiconductor market, now also threatens Europe striving for a green transformation including the production of solar panels, wind turbines, batteries and electric vehicles. Europe's "war" with China was inevitable because the Old Continent has a much more open economy (see chart) and therefore stands to lose the most not only as a result of state subsidies in other countries, but also the game of fragmentation, i.e. geopolitical dynamics, within in which the United States, Europe and China are moving the production of key technologies back to their own territory in order to eliminate strategic weaknesses.

Avoid actions by electric car manufacturers

If electric vehicles become part of the geopolitical fragmentation game, predicting which automaker will win and how market share will disperse in the future will be even more difficult. In our recent stock market analysis titled How the ecosystem around electric cars is developing We highlight the unpredictability surrounding EV manufacturers and the fact that the EV ecosystem, including charging stations, batteries, lithium and battery recycling, may become more predictable and deliver higher returns in the future. As we have repeatedly emphasized, the total market value of automotive companies (producers of combustion and electric cars) has increased by 7,5% over the last 148 years despite low growth on the general market. This suggests mispricing due to technological innovations related to electric vehicles or the possibility that cars will be sold at a much higher profit in the future, but the "easy" growth of Chinese electric vehicle makers suggests that cars will become even more commoditized in the future, so it is difficult to see these higher margins.

About the Author

Peter potter - director of equity markets strategy in Saxo Bank. Develops investment strategies and analyzes of the stock market as well as individual companies, using statistical methods and models. Garnry creates Alpha Picks for Saxo Bank, a monthly magazine in which the most attractive companies in the US, Europe and Asia are selected. It also contributes to Saxo Bank's quarterly and annual forecasts "Shocking forecasts". He regularly gives comments on television, including CNBC and Bloomberg TV.